August 9, 2016
On 7 July 2006, Montenegro (then a newly independent state) established diplomatic relations with the People’s Republic of China. China had recognized Montenegro’s sovereignty less than a month before. Since then, China’s relationship with Montenegro and other ex-Yugoslav countries has progressively evolved.
According to Loïc Poulain’s article China’s New Balkan Strategy (2011), China invests in Southeastern Europe in order to “circumvent the EU’s anti-dumping regulations and export products directly to a market of some 800 million people”. According to the same article, the Balkans, with their free-trade agreements and strategic positioning, are crucial for the resurrection and extension of the ancient Silk Road which would reduce the time needed for Chinese products to reach Europe.
Even though China’s grand Balkan scheme is somewhat doubtful, the intensification of Chinese investment in the region speaks to an increasingly growing interest. The best manifestation of this is the “16+1” initiative which started in 2012 and which seeks to improve economic relations between China and 16 European countries, including Albania, Bosnia, Croatia, Macedonia, Montenegro, Serbia, and Slovenia. At the last summit of the “16+1” platform in December 2014 in Belgrade, China promised a $3bn investment fund for Central and Eastern Europe.
Montenegro: Fleet Renewal and Highway Investments
Despite all of this, China is not a top investor in Montenegro at present. As a recent article concerning the Central Bank of Montenegro report on FDI notes, top investors are Norway, Italy, Hungary and Russia (in that exact, surprising order). However, the China Exim Bank loans for the construction of the Podgorica-Kolasin motorway section (total cost 809.6 million euros) and for the renewal of the Montenegrin ship fleet (total cost circa €100 million) are in no way negligible.
In fact, Prime Minister Djukanovic had already in 2013 deemed the motorway project “the most important infrastructure project for the future economic development of Montenegro”. The financing agreement for the motorway project entitling China Road and Bridge Corp (CRBC) to build 41 kilometers of the 169.2 kilometers Bar-Boljare motorway was signed on 30 October, 2014. The conditions are favorable. The €689 million loan is given for 20 years, with a 6-year grace period and a 2% fixed interest rate. The project is exempted from taxes and custom fees under the Law on Major Highway and requires that at least 30% of the work be assigned to local companies.
However, the project has been a fairly controversial topic in Montenegro itself. In March 2014, the World Bank withdrew its budget support loan while the IMF warned of dangers to fiscal stability. The EBRD 2015-2016 Transition Report deemed economic growth of Montenegro in 2014 “disappointing”. Moreover, public debt has been gradually increasing (70.56% GDP in 2016 and growing) while the repayment of debt is requiring greater funds each year.
MP Mladen Bojanic spoke of the other risks involved in the motorway project in an interview in November 2014, noting the currency risk (the loan is denominated in US dollars), the risk of construction quality, the risk of failure to fulfill the deadline (set for 2019) and so on.
There is also a risk that most of the work will be done by Chinese personnel, at the expense of the local Montenegrin workforce, and the fact that many investors are government-owned companies which could “raise eyebrows… in Brussels”, according to a Forbes article from June 2016.
Budget and Exemption Issues
The controversy surrounding the construction of the motorway Bar-Boljare partially stems from the way in which the Parliament of Montenegro approved the project in the first place. Namely, a new law on fiscal responsibility was passed in 2014 as a way to improve public finance management. However, the motorway was termed a project of national interest which allowed for higher deficit and debt in its case, despite the newly adapted law. In order to accommodate obligations related to the motorway project, the Montenegrin government introduced measures of fiscal tightening – a 2% VAT increase, a 4% income tax for above-average earnings and more.
Debt and Developments
These measures, however, are not entirely negative. Their timing and extent, according to the EBRD 2015-2016 Transition Report indicate that they are a sign of “progress in consolidating public finances in Montenegro”. For example, the 7 cents tax on gasoline and taxes to be introduced on coffee, alcohol, carbonated drinks, tobacco etc. are very unpopular but are also a way to prepare for the repayment of the motorway project loan.
In the same vein, the steadily increasing public debt is concerning. However, the motorway project – the main reason for its increase – is “an investment which will positively affect Montenegrin economy”, according to the Central Bank of Montenegro governor Milojica Dakic. The first beneficiaries of the motorway project are the owners of domestic construction companies – the contract stipulates that these companies are supposed to do 30% of the work. According to Ivan Brajovic, the Minister of Transport and Maritime Affairs, 25.16% of the work has been subcontracted so far, while 684 workers have been engaged in the construction.
Some worries, however, remain. The official start of the motorway project was supposed to have been on May 11, 2015. However, the first leveling of the concrete for the Moracica bridge, marking the real beginning of the works took place very recently, on June 3, 2016. The delays bring into question the possibility of finishing the project within the agreed deadline and budget. However, as Brajovic noted, the state has protected itself from delays caused by the contractor. According to him, “the value of agreed penalties reaches 5% of the total project value.”
Other Chinese Projects in Montenegro
Aside from the motorway project, China has one more significant investment in Montenegro, and two more potential investments. They are summarized well in a recent article by Central European Initiative and consist of:
Renewal of the ship fleet
Energy projects (potential)
Blue Corridor Motorway project (potential)
The renewal of the ship fleet began with a loan from China’s Exim Bank worth €56 million. Montenegro used this money to buy two ships, made by Chinese Poly Group. The first two ships were delivered in 2012 for the Montenegrin maritime company, thanks to a 3% fixed interest loan with a 5-year grace period and 15-year maturity. The second two ships were ordered the same year but under slightly different arrangements – 20-year maturity and 2% interest rate for a loan worth around 41 million euros.
According to the above-mentioned article by Central European Initiative, the potential investments in the energy projects in Montenegro consist of the construction of hydropower plants on the Moraca and Komarnica (5 in total) with combined costs of €664 million, and a new unit of a thermal power plant in Pljevlja, worth €326 million. The Chinese Companies Consortium delivered an offer for the power plan unit in March 2013. However, the project was not followed through.
Finally, there is the possibility of Chinese investment in the Blue Corridor motorway project, stretching along the eastern shore of the Adriatic and Ionian seas. The Memorandum of Understanding between Montenegro, Albania and China’s Pacific Construction Group Corporation Limited was signed in November 2015. However, there have been no other concrete developments on this project so far.
As a strong economy with favorable loan conditions and an alternative to the European Union’s more rigid investment funds stipulations, China is an increasingly important partner for the Balkan countries. Its growing interest in the Balkans and Montenegro can be seen from the above examples. China’s interest in the Balkans might as well be, as Poulain’s China’s New Balkan Strategy suggested five years ago, primarily a way to expand the Chinese exports. However, its investments in Montenegro suggest that both sides benefit. The concerns surrounding the motorway project and other Chinese investments, however, should not be ignored. With the ongoing works and continued partnership, the extent of the benefits Montenegro will reap in the long run remains to be seen.